Category Archives: Personal Portfolio

A Year for Non-US Developed Market Equities

ECB QE, Stronger Dollar, GPIF / BOJ ETF buying – this is setting up to be the year of non-US DM equities. Beggaring thy neighbor, negative sovereign yields, and insane compression of credit spreads have/will cause a generational asset squeeze.

Are valuations too high and fake? Probably… but who cares. We discount by ~ (B * eqrp + rf). rf is negative. eqrp (at least the vol risk premium part) is restrained by central banks.

DAX – Up 17.4% YTD
NIKKEI – Up 7.4% YTD

I suspect Shanghai Composite is about to fall off a cliff though. Also, NFP tomorrow threatens to change the macro landscape / theme. SPX will continue to lag it’s global counterparts.

I’m uncautiously long… but will get cautious if I see an impending risky catalyst. There are no catalysts around… so buy the rallies & buy the dips.

PS – Been really too busy to post. I’m a bit worried that I’m compounding returns into a blowup “0”. Luckily, that hasn’t happened yet. I continue to take unbecoming magnitudes of risk, but will scale back into cruise control soon.

 

2014 Year in Review

Blended 2014 statistics for the “Lawrence Zhou No Real Alpha High Leverage Don’t Follow Me Into Trades Fund”, including deposits/withdrawals purely for “safety” margin (understates actual P&L). This is almost straight from IB (except for DD, which they calculate incorrectly).

Blended Stats:
Return: 237.64%
Daily StDev: 4.32%
Sharpe: 2.46
Max Drawdown: 42%

Best Delta Exposures:
Long Dollar
Long SPX
Long AAPL & BIDU

Worst Delta Exposures:
Long Crude
Long Bitcoin (still have two R9 290xs for a mining-switch strats [that bombed] for sale)
Short USDRUB (so far) – will write something more robust in the future

Basically, long bubbles (non-linear growth in log prices) & long momentum worked. Long mean reversion did not work.

2015 Initial Thoughts:

  • I targeted an insane RoR this year – which came with insane risks. I plan to “de-risk” significantly next year, with the expectation that volatility will increase.
  • As long as QE / intervention persist globally, a “long bubble” strat should work. Will rate/QE-driven credit booms happen in Europe & China (the two holdouts)? Who knows… Draghi has under-delivered, and China seems committed to “fine-tuning”. But rates globally are incredibly low (especially in the US), which should continue to fuel yield (or dividend) seeking plays.
  • Equity markets are probably over-valued, but might be over-valued for quite some time. New (and massive) tech IPOs will put pressure on the market via supply.
  • Geopolitical risk is real, especially with Grexit in the near term. Does Greece really pose a systemic risk to the world? Ultimately, unlikely. We’ve had since 2011 to prepare… and the country’s GDP is only a few billion more than AAPL’s revenues. The tremors & uncertainty it causes, though, will be felt. What are the implications if all the periphery decide to bail (as a tail case)? Euro was a bad idea to begin with.
  • Russia will probably not default… but edge chance they invade Ukraine. Certainly a risk to look out for.
  • Oil – I have 0 idea where it goes. I got burned already, so I’ll stay away and watch. Apparently, oil is extremely inelastic on the short end, and the tankers rates are already skyrocketing (Brent March 2016 vs 2015 is 67.3 vs 58.21, or ~15%).
  • Volatility looks cheap going into 2015…

 

End-Year Gambits

These are my Hail Marys. All trades subject to change based on fear, greed, ignorance, hope, or margin calls.

1) Long USD in massive size (short JPY / Euro)
2) Long ES straddle
3) Short Crude
4) Long Nikkei (BOJ buys equities — yea… really).
5) Long BIDU

In Kuroda I trust. Maybe Abe too. Please don’t burn me bros.

Kuroda - BOJ

* 12/12/2014, 7:20 AM EST – After some reading, thinking, and praying… I’ve decided that we’ve bottomed. I took off the crude short, cut some puts on my straddle. I cut Long Nikkei for now, but will reenter closer to EOD.

Posting these quick changes is getting semi-tedious… so maybe tweeting is better realtime (@lrzhou)

 

 

Crude Blowup

WTI Crude is now below $65. I attempted to catch the knife on Friday, but ended up losing a hand. I’m a bit disturbed at the implications and potential for collateral damage. High Yield? Margin Calls? What about a recognition of a potential hard-landing in China? Is the commodity glut really a supply story? Or a demand one?

I’ve cut most of my long-beta position. I might be the fearful fool, though. Maybe the “oil stimulus” story is real, but I’m skeptical for now.

Edit: I put my beta exposure back on this morning (12/1/14, 10:17AM). Markets don’t care about cracks… we’re going higher.

Plausible Free Money

We’re all trained to be overly skeptical. Markets are generally efficient. Everything is priced in. You never get something for nothing.

It’s not surprising that this mentality gets ingrained in us. We live in a culture of economic distrust. Everyone is out to get us. We’re the products being sold on Facebook and Google. Anyone offering us a free CD or squeegeeing  is a charlatan. If something looks too good to be true, it must be.

It’s taken me over nine years to recant the skepticism. But I’ve recanted. “Too good to be true” opportunities end up being good and true all the time. There seems to be free money everywhere. That money might be risky. Sometimes, you’re picking up nickles in front of steam rollers. Most of the time, though, you end up picking up fifties in front of baby strollers.

I’m trying a new strategy in 2015 (along with the other strategies I detailed earlier). I plan to pick up (in small size) any “plausible” free money in the markets.

  • It must obviously be free money and a no-brainer.
  • It should be too good to be true without being a definite scam.
  • Estimating the free money must not be more complicated than assessing 3-4 numbers with arithmetic.
  • It must be well known free money (ie, it’s not a secret that I’ve discovered by digging into the 10K).
  • Any previous market actions don’t matter… nothing is ever priced in.

Dumb Money JPY Short

I’m going to be the chump and jump on the short JPY bandwagon. I have a low tolerance for risk here, though, so I’ll probably cut with a stop-loss of 0.5% (I sold at ~0.008644 or ~115.68 on the Dec 15’14 futures). I’ll take any loss as a lesson to not screw with Mrs. Watanabe.

The QE news is well known, but currencies will take time to adjust. Structural adjustments will take even longer to flow through (pension reg changes, etc). Abenomics version #1 (Nov 2012) lasted months. I have no reason to believe version #2 won’t last as long (after all, economic data will come at low to medium frequencies).

(On a side note, I put in a tiny long in SLXP after discussion with a friend on Friday).

Delevering Sooner?

I don’t think I can wait for S&P 2,100 anymore. Turkeys, Santa, Jeremy Seigel, and indomitable holiday optimism would have us believe that the only way to live is long and strong. But last night, I experienced a most ominous dream.

In my dream, I was at the RentHop offices with my IB terminal open. In the place of our Director of Product, though, sat George Soros. I looked over at his screen and saw him closing all his positions. I quickly copied him. After all, who am I to question the grand master of reflexivity? A few minutes later, the markets toppled and collapsed.

Maybe I had the dream because of the leverage I’m running. Or perhaps it was from the Soros article I read right before I went to bed. Either way, I’ve found that my dreams have been surprisingly prescient (in fact, I dreamt something similar in mid-September).

There are certainly cracks in the system appearing. Fighting has broken out yet again in Ukraine. ISI is portending potential earnings readjustments. More importantly, we’ve pretty much staged a full V-shaped recovery since October.

I think starting early/mid next week, I’ll move deep ITM long options positions into OTM call options (with slightly lower delta). Implied volatility has dropped like a stone since mid-October, so this is a safer way to play potential rallies. I might fund these with 1×2 or 2×3 on the call side.

George Soros

Bullets and Bazookas

I’ve decided to cut risk today by around 15% (I still remain very long and very bullish). The general risk reduction applies to my entire portfolio, but I’ve largely undone the extra EUR short that I put on on the 22nd (risk/reward seems lower here + I’m tired of waiting for actual ECB action). This is in light of the decrease in positive “tail risks” that I see. I’m going to target roughly 2 – 3% in daily volatility into the New Year (and will adjust accordingly if vol increases). I’ve also reduced gamma on near-dated options to prevent theta burn.

Positive Pressures

  • Earnings drift – US earnings growth will continue to be a positive going forward. Annually (assuming constant multiples), that means roughly ~4-5% of nominal appreciation.
  • Global QE flow-through – Implementation of QE & balance-sheet expansion actually matters (not just the announcement). This will cause a constant pressure up in the next year or so.
  • Continued buybacks & corporate action – This will serve to lower the “duration” of stocks (if we think about stocks as a CF stream). Perhaps it also means less sensitivity to rates and implied risk premium.
  • Seasonal effects – Everyone loves turkeys and Santa.
  • Short-term cheap oil – In the near-term (and through the holidays), the cheaper oil should have a non-trivial effect on spending. Perhaps it’ll be a retail bonanza this year.
  • Low interest rates forever – At this point, I’m solidly in the “global deflation export” camp. We’re going to be getting cheap capital from around the world in perpetuity. Sadly, it’s up to us to carry the world.

Negative Pressures

  • China “Harder Landing” than expected – Market news has been remarkably quiet about China in recent months. Everyone seemed to shrug off the weaker GDP and PMI numbers. So far, the PBOC & the Chinese government have the situation under control. But I’m a bit worried about this one… quite worried.

China Housing

  • Bazookas fired & bullets expended – For now, it appears that the Central Banks of the world have run out of bullets to fire. We’re still anticipating some “great action” by the ECB but that might be a story for next year. Until then, though, everyone is in wait-and-see mode. The PBOC still has bazookas to fire, but will likely only use it if some drastic event happens.
  • Perceived “bubbles” & extended multiples – I don’t believe the S&P is overvalued. In fact, with certain assumptions, we might even be undervalued (See this old gem by Damodawan). However, given the 5-year bull market, we’re seeing stronger calls by bears. The fear is there, and will potentially result in repricing of risk. However, this is not the global top (if a top at all).
  • Eurozone In-action (but more bucket kicking) – I have little hope of any real change in Europe until shit really hits the fan. Their system is in more gridlock than Republicans & Democrats. More indecision there (coupled with any more negative growth news) will add negative pressure.
  • Sustained low oil prices – I don’t actually expect this to happen. But a lot of “bad things” can happen if oil prices remain too low for too long. Sure, we’ll have positive flow-through to the US consumer, but we’ll also damage one of the main growth sectors in our economy. Perhaps more worrying, I foresee massive tail-risks from the collapse / weakening of oil-dependent nation (particularly Russia & Venezuela).
  • “Stronger” dollar – will be bad for multi-nationals. But might lower input prices for some.

Bullets Expended

  • Draghi’s jawboning – I don’t know how much longer he can jawbone markets without actual significant intervention. He’s promised a lot, and we’ve priced in a lot. Plus there appears to be some real drama at the ECB.
  • More US QE – It’s possible, but only if we double dip or the recovery stalls. However, we shouldn’t expect more QE into growth. Again, Yellen Straddle (no longer Put).
  • Ebola “Hype” Recognized – The scare is over. Ebola was never a “real” threat to the US. But judging from the impact, you’d have thought 9/11 happened again (airline stocks dropped ~30% in September / October!).

AAL Drop

Bazookas Fired

  • Japan seems to be executing the ultimate Hail Mary. They’ve decided to sac the Yen in a last-ditch effort to bolster the economy. I have my doubts, though, given lingering structural issues. One positive, however, is that pension rule changes will likely add a massive tailwind to global equities (mostly the US). Will also cause continued pressure on JPY.